October 2011 - Global Economic Watch

Hip-Hop Culture and Marketing in the New Economy

10-31-2011 9:37 AM with no comments

Steve Stoute, CEO of the marketing agency Translation, believes that traditional marketing does not fit with the new economy and in particular with Millenial consumers.  A former record executive, Stoute came to recognize that the old way of looking at demographics no longer seemed relevant, so he coined a phrase to mark what he was seeing: "tanning."  He came to believe that many American companies were missing out on connecting with American consumers across demographic lines by shunning hip-hop culture even as it continued to grow and grow. 

Stoute recently spoke about his new book, The Tanning of America: How Hip-Hop Created a Culture That Rewrote the Rules of the New Economy, in this HBR IdeaCast:

Posted by Graham Griffith

EconBrowser: Climbing the Mountain that is the Mortgage-Debt-to-Income Ratio

10-31-2011 9:23 AM with no comments

James Hamilton thinks that in order to return to a healthy economy we need to do something about this:

Household mortgage debt skyrocketed in the 2000s, and income did not keep up. The solution depends on some mix of foreclosures, increased saving, and GDP growth.  But these elements don't make good teammates with the economy in its current state.  So Hamilton, writing at EconBrowser, offers some support for the Federal Housing Finance Agency proposal to alter the Home Affordable Refinance Program:

One obstacle to refinancing has been mortgages that are underwater, which means that, as a result of declines in house prices since the time of the purchase, the principal owed on the mortgage exceeds the current resale value of the home. Previous rules would not allow Fannie or Freddie to guarantee a loan whose value exceeds that of the home, which refinancing an underwater loan would require. The new FHFA proposal relaxes that requirement so as to allow refinancing for underwater loans that were originated more than 2-1/2 years ago and on which the borrower is current on the payments with no late payments over the last 6 months.

One question of interest is, who will ultimately end up losing the income that corresponds to the household's gain from refinancing? Since the original loans are currently guaranteed by Fannie or Freddie, and since Fannie and Freddie's liabilities in turn are now de facto guaranteed by the U.S. Treasury, one's first thought might be that the household's gain is ultimately the loss of the U.S. Treasury. However, Fannie and Freddie guarantee against default but not against the loss that comes from pre-payment, so it's the holder of the loan, not the U.S. Treasury, that loses. On the other hand, Fannie and Freddie own over a trillion dollars of the loans themselves, and the Federal Reserve owns another trillion. The Federal Reserve contributed $82 billion to the U.S. Treasury this year from its earnings on the mortgage-backed securities and other assets that it holds. A lower income flow from these would reduce the size of the payments to the Treasury that the Fed is able to make and increase the net contribution the Treasury needs to make to keep Fannie and Freddie solvent.

Read Hamilton's full analysis here.

Posted by Graham Griffith

McKinsey Quarterly: Capturing the Value of 'Big Data'

10-27-2011 2:26 PM with no comments

We are living in the age of "big data."  We have access to more information and more tools for measuring those things that are important to organizations.  The potential to use this data to make better decisions is great.  But with so much data, there is also the potential for getting lost in the weeds. 

The McKinsey Quarterly has a special package of articles on big data.  And they have put together a helpful graphic visualization to show the challenges and opportunities for various sectors in accessing big data:

McKinsey researchers Brad Brown, Michael Chui, and James Manyika go on to pose the five questions that organizations should consider as they work to make the most of all the data available to them:

1. What happens in a world of radical transparency, with data widely available?

2. If you could test all of your decisions, how would that change the way you compete?

3. How would your business change if you used big data for widespread, real-time customization?

4. How can big data augment or even replace management?

5. Could you create a new business model based on data?

For further elaboration on these questions, read Are you ready for the era of ‘big data’? here. 

Posted by Graham Griffith

Paulson: Reforms Needed in China and US to Sustain Global Economic Growth

10-27-2011 8:20 AM with no comments

Three years removed from his darkest hours as Treasury Secretary, Henry Paulson is ruminating on how to fix this country's jobs and growth problems.  He discussed the need for new ideas with the Wall Street Journal's David Wessel this week.  At the top of his list: China and the US coming up with new ways to get their economies to work together.  Paulson says "fundamental reform" in both countries is necessary or the whole global economy will suffer:

Posted by Graham Griffith

Bhagwati on the 'Growth-First Model' in Developing Economies

10-27-2011 8:10 AM with no comments

Jagdish Bhagwati once again states his case for economic growth as the best path toward increased welfare of citizens across the income spectrum.  At Project Syndicate, he argues that the best policy for countries with large populations living at or below poverty levels is growth with an explicit "inclusive development" strategy:

Since the 1950’s, developmental economists have understood that growth in GNP is not synonymous with increased welfare. But, even prior to independence, India’s leaders saw growth as essential for reducing poverty and increasing social welfare. In economic terms, growth was an instrument, not a target – the means by which the true targets, like poverty reduction and the social advancement of the masses, would be achieved.

A quarter-century ago, I pointed out the two distinct ways in which economic growth would have this effect. First, growth would pull the poor into gainful employment, thereby helping to lift them out of poverty. Higher incomes would enable them to increase their personal spending on education and health (as seems to have been happening in India during its recent period of accelerated growth).

Second, growth increases state revenues, which means that the government can potentially spend more on health and education for the poor. Of course, a country does not necessarily spend more on such items simply because it has increased revenue, and, even if it does, the programs it chooses to fund may not be effective.

Read Does Redistributing Income Reduce Poverty? here.

Posted by Graham Griffith

John Cassidy Discusses Keynes on the Leonard Lopate Show

10-26-2011 8:06 AM with no comments

If you found John Cassidy's New Yorker article on Keynes--The Demand Doctor--enlightening and/or provocative, you will likely appreciate his interview on WNYC's The Leonard Lopate Show.  The interview prompted Cassidy to further consider whether there have been any important economic "big ideas" in recent years.  Cassidy's answer to Lopate's question about big ideas was simply "no" (near the end of the interview).  He had time to give the question more thought after the interview, and wrote a longer response online (spoiler alert, the answer is still "no). 

Here is the interview from WNYC:

Posted by Graham Griffith

How Greek Debt is Like the Sun

10-26-2011 7:56 AM with no comments

All things in moderation, even exposure. 

Marketplace's Paddy Hirsch says some exposure to Greek debt is not a bad thing.  A lot of exposure is.  "Greek debt is a bit like the sun," Hirsch tells us. 

He explains the value of a little exposure in this Marketplace Whiteboard:

Posted by Graham Griffith

China's Youth and the Shared Value Economy

10-26-2011 7:37 AM with no comments

Perhaps you are familiar with the concept of a shared value economy.  If not, dart over to our post from January to watch Michael Porter explain the concept.  In short, the idea is that healthy capitalism today depends on businesses recognizing the importance of societal needs.  Porter and others believe that more boats are lifted (and that includes lifting profits) when business is moving in the same direction as efforts to build sustainable, healthy communities--or or even leading the charge. 

At Forbes, Kevin Lee poses an interesting thesis.  Lee, COO of China Youthology, argues that China is the right environment for a shared values approach to take root and be successful.  And he thinks his clientele, the youth of China, will be the drivers.  He puts forward the following reasons for this belief:

1)   Chinese youth are already in-step with the newest global ideas.

Participatory culture from the Internet, social media, and mobile has been the experience of Chinese youth, similar to those in other countries. New concepts such as shared value not only have a receptive audience with Chinese youth, they are actively advocated and spread.  Isaac Mao, one of China’s earliest bloggers, leads Sharism.org in China, an organization dedicated to educating and advocating the philosophy and practice of Sharism. “The more you give, the more you get, the more you share, the more you’re shared”. Frequent meetings and conferences are held in Beijing and Shanghai, attended by some of the top thought leaders and Internet influencers in China.  Other than the Internet and social media, youth growing up in China have few other social spaces to call their own. So participatory culture and derived concepts have become important for them to cling to, as it makes up a larger piece of their generational identity.

2) Hyper growth means less entrenched traditional norms.

Chinese youth have only known fast and radical change. New is normal.  Therefore Chinese youth are seeking new meaning in all aspects of their life; the meanings of self-identity, of being an individual, of being a society. This extends to re-examining old ideas that older generations hold so dear. Chinese youth are less resistant, and more willing to re-define the meanings of business, industry and capitalism. Unlike other developed societies where the definitions of these concepts are treated as sacred and entrenched at an early age, in China these terms are newer, and much greyer. Other developed capitalist countries will take longer to extricate themselves from what they know and dare to reconsider the validity. China’s youth do not have that problem. They are re-defining traditional capitalism right now.

3) China’s next generation cannot keep up with traditional consumption.

This is one of the most important drivers for China’s potential leadership in shared value. Young people’s job and income prospects are far worse in China than in many other developed countries, while competition is several times greater. Even the hopes of achieving middle class consumption levels are a real struggle in China. A young person would need to take out a 70- to 80-year mortgage to buy a small apartment in one of China’s major cities.  The traditional expectations of a consumption economy are not possible in China’s reality. Chinese youth are driven towards different solutions to survive and flourish. Shared value can fit this need.

4) First chances for creation, making new rules.

If we had the first three reasons, but a completely restrictive government and market, there would be no chance for this generation of China’s youth to champion shared value. Luckily this is not the case. China’s emerging market economy means there is room for new firsts in everything. Few legacy systems or processes means entrepreneurs and organizations have the chance now to re-structure the market and industries to newer business concepts. In addition, few legacy ecosystems and competencies mean entrepreneurs and organizations must develop new clusters to create markets and pool resources to gather strength enough to build something of value. This is shared value in action.

Read Can China Lead The Development Of The Shared Value Economy? here.

Posted by Graham Griffith

Looking Back at When Federal Debt Seemed to be on its Way Out

10-24-2011 9:06 AM with no comments

What a difference a decade makes.  In a January 2001 report, the Congressional Budget Office projected that the US government would eliminate its debt within five years, and "be $2.3 trillion in the black," according to a new paper from the Pew Charitable Trusts.  Of course, that did not happen, and the Pew paper sets out to explain why.  Here is a helpful chart from the report:

Read The Great Debt Shift Drivers of Federal Debt Since 2001 here. 

We learned about the Pew report from Planet Money.  As it turns out, the CBO wasn't the only place a decade ago where economists were projecting the US government paying off its debt.  Economists in the Clinton White House identified this potential problem as well.  That's right, problem.  These economists were concerned at how ending federal debt might set off a series of negative ripple effects through the economy.  So Jason Seligman, who was working at the Council of Economic Advisers, authored a report on the potential effects of "too little" debt.  The report was never published.  But Planet Money's David Kestenbaum got his hands on the report.  He and Alex Blumberg talked about the report with Seligman on the latest Planet Money podcast:

Planet Money provides access to the report here.

Posted by Graham Griffith

Walter Isaacson on Steve Jobs

10-24-2011 8:19 AM with no comments

Walter Isaacson has been hard at work finishing his biography of Steve Jobs.  The book, out today, is the result of 40 interviews that Isaacson conducted with Jobs, and many more with Jobs's friends family and colleagues, over the last seven years.  Isaacson spoke about Jobs on 60 Minutes.  Here is an excerpt, in which Isaacson discusses Jobs's personal life, his early days as a complicated colleague at Atari, and how he and Steve Wozniak founded Apple computer from his parents' garage.  We find the second half of this segment particularly interesting, as Isaacson discusses what some Apple employees refer to as Jobs's "reality distortion field," which seems to have made him a very difficult friend and colleague, but perhaps also explains some of his more surprising successes as a business leader.

Watch the full interview here. 

Posted by Graham Griffith

Surowiecki: Americans Have 'Soft Spot' for Small Businesses, But Large Businesses Drive the Economy

10-24-2011 8:03 AM with no comments

New Yorker writer James Surowiecki challenges the political rhetoric that small businesses drive America's prosperity.  Sharing a history lesson from Marc Levinson's The Great A. & P. and the Struggle for Small Business in America, Surowiecki points to past efforts to control large businesses on behalf of small stores through policing prices that suppliers charged chain retailers.  From his Financial Page column:

These days, government regulation to keep prices high is less popular. But the fetishization of small business continues apace. Some of the support derives from real virtues that small companies offer—diversity of choice, connection to local communities. But much of it derives from the idea that the nation’s economic well-being depends on such companies. Given that the overwhelming number of American businesses are small, and that, as we’ve all heard, small businesses create most new jobs, this seems reasonable enough. But the truth is that, from the perspective of the economy as a whole, small companies are not the real drivers of growth. One can see this by looking at the track record of the world’s economies. The developed countries with the highest percentage of workers employed by small businesses include Greece, Portugal, Spain, and Italy—that is, the four countries whose economic woes are wreaking such havoc on financial markets. Meanwhile, the countries with the lowest percentage of workers employed by small businesses are Germany, Sweden, Denmark, and the U.S.—some of the strongest economies in the world.

This correlation is not a coincidence. It reflects a simple reality: small businesses are, on the whole, less productive than big businesses, and though they do create most jobs, they also destroy most jobs, since, while starting a business is easy, keeping it going is hard. This is true around the world. A recent study by the World Bank that looked at ninety-nine developing countries found that large firms had significantly higher productivity growth. And in the U.S. the connection between size and productivity is, as a 2009 study showed, especially close. In part, this is because big businesses are able to enjoy economies of scale and scope. Big businesses are also better able to make investments in productivity-enhancing technologies and systems; in the U.S., for instance, big companies account for the vast majority of R. & D. spending.

Read Big is Beautiful here.

Posted by Graham Griffith

SF Fed Economic Letter: A Potential Decline in the Decline of Small Business Lending

10-21-2011 12:49 PM with no comments

While the number and overall value of loans to small businesses continues to decline, the rate of decline may be leveling off, according to San Francisco Fed economists Liz Laderman and James Gillan.  In an Economic Letter, Laderman and Gillan chart lending to small businesses from large and small banks.  Here's the trend for large banks:

Laderman and Gillan write:

The small business loan trend at large banks is similar to the trend for all banks. Aggregate small business loans at large banks shrank between June 30, 2008, and June, 30, 2009, at a steeper rate from then until June 30, 2010, and more slowly over the four quarters to June 30, 2011 (Figure 1). At those large banks, the rate of contraction moderated for small CRE loans and especially for small C&I loans.

The moderation in C&I contraction since mid-2010 is consistent with the results of the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, which gathers data from approximately 60 large domestic banks plus some U.S. branches and agencies of foreign banks. The July 2010 survey was the first to show an easing of standards on C&I loans to smaller businesses since late 2006 (Federal Reserve Board 2010).

But, whether positive growth in small C&I loans at large banks will soon occur and be sustained may depend on small business loan demand. The National Federation of Independent Business reports that about 25% of the small businesses it surveys cite poor sales as their main business problem. In contrast, only 3% cite financing as their main business problem, although 8% report that not all of their credit needs are satisfied (Dunkelberg and Wade 2011).

It appears that a key variable for banks, small banks in particular, is whether small business loans are backed by commercial real estate or not.  Those loans not backed by real estate are looking more promising.  Read Recent Trends in Small Business Lending here.

Posted by Graham Griffith

Zombies, the Economy, and 'The Economics of Good and Evil'

10-21-2011 9:30 AM with no comments

We're starting to wonder whether zombies will end up serving as mascots for this period of economic decline.  True to their nature, they just won't go away--new movies, new television shows, and too many trick-or-treaters to count coming soon to a leafy suburban street near you.   Czech economist Tomas Sedlacek is playing to the zombie theme as well.  Sedlacek visited the Carnegie Council earlier this month to discuss his book, Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street, and he made the link between horror movies and the current state of the economy:

Watch the full speech here. 

Posted by Graham Griffith

Mark Thoma Sees SIgns of Coming Fed Action

10-21-2011 8:42 AM with no comments

In his Money Watch column, Mark Thoma looks at the below graph and sees signs that the Fed will pursue further quantitative easing measures:

Thoma writes:

The Fed is very sensitive to and very fearful of deflation, and the fall in inflation expectations evident in the graph was one of the reasons the Fed decided to implement QE1. And as you can see from the graph, this (along with the other steps the Fed took at that time) turned the expectations around, at least for awhile. However, just before the dotted vertical line on the graph, expectations began falling again. What is the vertical line? It shows the point in time when QE2 was announced by Ben Bernanke (August 27 of 2010 at Jackson Hole, Wyoming), and once again inflation expectations turned around.

However, notice that recently the trend has turned downward again and if this continues the Fed is likely to intervene once again.

What do you see in the graph?

Do monetary policy measures need to be taken?  What are the lessons from QE1 and QE2?

Read The Fed Is Laying the Groundwork for Further Easing here.

Posted by Graham Griffith

David Cay Johnston Sums Up Pay Data in One Word: "Awful"

10-20-2011 1:55 PM with no comments

As we've highlighted in the past, the US hasn't just been shedding jobs.  Median wages have gone down as well.  David Cay Johnston illustrates this in his Reuters column today:

Johnston writes:

In 2010 total wages and salaries came to $6,009,831,055,912.11.

That's a bit more than $6 trillion. Adjusted for inflation, that is less than each of the previous four years and almost identical to 2005, when the U.S. population was 4.2 percent smaller.

While median pay -- the halfway point on the salary ladder declined, average pay rose because of continuing increases at the top. Average pay was $39,959 last year, up $46 -- or less than a buck a week -- compared with 2009. Average pay peaked in 2007 at $40,764, which is $15 a week more than average weekly wage income in 2010.

The number of workers making $1 million or more rose to almost 94,000 from 78,000 in 2009. However, that was still below some earlier years, including 2007, when more than 110,000 workers made more than $1 million each. At the very top, the number of workers making more than $50 million rose in 2010 to 81, up from 72 the year before. But average pay in this group declined $4.5 million to $79.6 million.

Read First look at US pay data, it’s awful here.

Posted by Graham Griffith